Saturday, September 10, 2005

In a rising stock market like we're enjoying right now, all investors are geniuses and one on-line broker is pretty much as good as another for getting a trade done.

In a declining stock market, things get a lot more complicated. One way to prepare for this is to take extra care in picking an on-line broker.

On-line brokers provide no advice -- that's why their commissions are so much less than full-service brokers. But if you choose your on-line broker wisely, you'll have the resources you need to invest successfully on your own through all market conditions.

BMO InvestorLine is just such a broker and that's why it came out on top in The Globe and Mail's annual on-line brokerage rating for the fourth consecutive year. Other top brokers this year are E*Trade Canada and TD Waterhouse. For this seventh annual survey, we've revamped the rating system so that brokers are evaluated in 10 areas that relate to their ability to serve the mainstream investor, which is someone who buys mutual funds and bonds as well as stocks, and is more attuned to goals such as a comfortable retirement than pure speculation. Direct-access brokers aren't covered here because they cater to active traders.

The 10 criteria are as follows.

Commissions: The ideal broker has reasonable fees for stock trading, charges zero commission to buy or sell most mutual funds and doesn't crush small investors with annual administration fees for their registered retirement accounts.

Research: There should be resources to help you choose stocks, funds and bonds that can't easily be found elsewhere on the Internet. Reports by stock and fund analysts are especially desirable as a source of second opinions.

Equity order flexibility: You should be able to do it all on your broker's on-line trading screen, from short selling to stop orders. The most highly developed brokers offer trailing stop orders, which are extremely useful for protecting gains and limiting losses.

On-line bond trading: On-line brokers sometimes pad the commissions they charge on bonds (you can't see this because the commissions are folded into quoted bond prices), but there's still a lot to be said for being able to sift through hundreds of government and corporate bonds for something that meets your needs.

Real-time account updates: There's something of the horse and buggy in those on-line brokers who don't update the daily changes in your account until several hours after the market closes.

On-line account maintenance: Forget calling your broker to take care of details such as ordering a cheque, transferring money, opening a new account or just posing a question. A well-run broker gives you a way to attend to these matters on-line.

Transaction history: Every credit and debit to your account should be listed from the date it was opened. The Internet offers this potential, but many brokers don't take advantage.

Account performance: Sure, your broker can tell you how much you're up or down in your various investments and portfolios, but what about the bigger picture of how you're doing annually or since inception? This is an area where no broker truly excels.

Website navigation: Clean and lean is best, but not all brokers understand this.

Value added: That totally subjective feeling of satisfaction you get from using your broker, whether it's from the whole package or just one thing done especially well.

Now for the ratings:

Rating the on-line brokers

A dozen brokers were poked and prodded to see how they scored in 10 key areas that are important to mainstream investors. Here are the scores:

BMO InvestorLine

http://www.bmoinvestorline.com

Owner: Bank of Montreal

Lowdown: A true innovator that strives to offer solutions to investors, not just a platform for trading securities and some research tools. This year, InvestorLine had the bright idea of providing prepackaged portfolios of exchange-traded funds, which are ideal for clients who want a simple, cheap and effective way to invest for the long term. Prefer regular funds? InvestorLine has portfolios of those constructed by fund analyst Ranga Chand.

Bottom line: A comfortable fit for most kinds of investors.

Reasonable commissions

for stocks and funds: 1

Equity and mutual fund research: .5

On-line bond trading: 1

Real-time account updates: 1

On-line transaction history: .5

On-line account maintenance: .5

Website navigation: 1

Account performance data: 1

Equity order flexibility: 1

Value added: 1

TOTAL:8 .5 / 10

GRADE A+

E*Trade Canada

http://www.etrade.ca

Owner: E*Trade Group

Lowdown: Whether you're an active trader or a buy-and-hold type who just wants a nice mix of stocks, bonds and funds, E*Trade is a good place to invest thanks to its reasonable commissions and a super website that puts clients in total control of their accounts. You can take care of virtually all administrative matters on the site, and it arguably offers the best trading platform of the brokers covered in this survey.

Bottom line: This is an on-line operation -- if you plan to trade by phone much or need lots of help, look elsewhere.

Reasonable commissions

for stocks and fund: 1

Equity and mutual fund research: .25

On-line bond trading: 1

Real-time account updates: 1

On-line transaction history: 1

On-line account maintenance: 1

Website navigation: 1

Account performance data: .25

Equity order flexibility: 1

Value added: .5

TOTAL: 8

GRADE A

TD Waterhouse

http://www.tdwaterhouse.ca

Owner: Toronto-Dominion Bank

Lowdown: Canada's biggest on-line broker coasted for a while, but it seems to be getting its act together. You'll see evidence of this in features like real-time account updates, which are coming early next month, and the recent introduction of research on what company insiders are doing with their shares. Tools like this make Waterhouse a good home for stock-focused investors, but more conservative types will like the on-line bond inventory (TD is among the most transparent on bond pricing) and the good selection of commission-free mutual funds.

Bottom line: On the upswing.

Reasonable commissions

for stocks and funds: .5

Equity and mutual fund research: 1

On-line bond trading: 1

Real-time account updates: 1

On-line transaction history: 1

On-line account maintenance: 1

Website navigation: .5

Account performance data: .5

Equity order flexibility: .75

Value added: .5

TOTAL: 7.75

GRADE B+

Qtrade Investor

http://www.qtrade.ca

Owner: Privately held

Lowdown: Check out this broker's website and then head over to InvestorLine. Notice the similarity? Oh well, if you're going to imitate, imitate the best. Qtrade doesn't have the bucks that InvestorLine does, so the overall effect isn't quite as polished. But everything you need is there.

Bottom line: A good choice among non-bank brokers.

Reasonable commissions

for stocks and fund: 1

Equity and mutual fund research: .25

On-line bond trading: 1

Real-time account updates: 1

On-line transaction history: 1

On-line account maintenance: .5

Website navigation: 1

Account performance data: --

Equity order flexibility: .75

Value added: .5

TOTAL: 7

GRADE B

Credential Direct

http://www.credentialdirect.ca

Owner: Canada's credit unions

Lowdown: Those credit union folks are as nice as can be, but what do they know about running an on-line brokerage? A fair bit, it turns out. Credential Direct offers a high level of user-friendliness, low commissions and some good financial planning tools to help you invest sensibly.

Bottom line: Lacks big bank polish, but that's credit unions for you.

Reasonable commissions

for stocks and fund: 1

Equity and mutual fund research: .5

On-line bond trading: 1

Real-time account updates: --

On-line transaction history: 1

On-line account maintenance: .5

Website navigation: 1

Account performance data: --

Equity order flexibility: .5

Value added: .5

TOTAL: 6

GRADE C

CIBC Investor's Edge

http://www.investorsedge.cibc.com

Owner: Canadian Imperial Bank of Commerce

Lowdown: These guys have all the bases covered, with on-line bonds, real-time account updates and scads of stock research from CIBC World Markets. What's lacking is the attention to detail that the best brokers have. Example: A featured list of core funds recommended by CIBC analysts is dated winter 2005.

Bottom line: Undemanding investors will be fine here.

Reasonable commissions

for stocks and fund: 1

Equity and mutual fund research: .75

On-line bond trading: 1

Real-time account updates: 1

On-line transaction history: .25

On-line account maintenance: .25

Website navigation: 1

Account performance data: --

Equity order flexibility: .25

Value added: .5

TOTAL: 6

GRADE C

ScotiaMcLeod Direct Investing

http://www.scotiamcleoddirect.com

Owner: Bank of Nova Scotia

Lowdown: An odd operation in that there are some amateurish elements -- the website, for example -- and some excellent ones that include the tools and resources for researching stocks and the reasonable commissions for stocks and funds. Also, you need on-line bond trading and real-time account updates to be a top on-line broker, and SMDI has neither (it does offer bond pricing on-line, though).

Bottom line: SMDI's research centre is a font of investing ideas.

Reasonable commissions

for stocks and fund: 1

Equity and mutual fund research: 1

On-line bond trading: .5

Real-time account updates: --

On-line transaction history: 1

On-line account maintenance: --

Website navigation: --

Account performance data: .5

Equity order flexibility: .75

Value added: 1

TOTAL: 5.75

GRADE C-

RBC Action Direct

http://www.actiondirect.com

Owner: Royal Bank of Canada

Lowdown: RBC doesn't seem especially interested in the on-line brokerage business. Yes, Action Direct is a perfectly adequate on-line broker. You've got your on-line bond trading, your equity research from RBC Dominion Securities (buried so far in the website that you're at risk of getting RSI trying to find it) and one of the better designed websites for clients. But there's also a sense of shortcuts being taken in a way that undermines the whole experience. Example: the website was redesigned about a year ago and RBC passed on the chance to add on-line account updates.

Bottom line: Not bad, but should be better.

Reasonable commissions

for stocks and funds: .5

Equity and mutual fund research: .75

On-line bond trading: 1

Real-time account updates: --

On-line transaction history: .5

On-line account maintenance: .75

Website navigation: 1

Account performance data: .5

Equity order flexibility: .25

Value added: .5

TOTAL: 5.75

GRADE C-

National Bank Discount Brokerage

http://www.nbc.ca

Owner: National Bank of Canada

Lowdown: This broker cannot compete with the top players, but features like on-line bond trading and simplified technical analysis of stocks will keep clients from feeling like they're being ignored.

Bottom line: A reasonable choice.

Reasonable commissions

for stocks and funds: 1

Equity and mutual fund research: .75

On-line bond trading: 1

Real-time account updates: --

On-line transaction history: .5

On-line account maintenance: .5

Website navigation: .5

Account performance data: --

Equity order flexibility: .75

Value added: .5

TOTAL: 5.5

GRADE C-

Disnat

http://www.disnat.com

Owner: Mouvement

des Caisses Desjardins

Lowdown: Big-time improvement here, even if the overall result still puts Disnat at the low end of the rating spectrum. Once a dinosaur, Disnat now offers a modest but up-to-date service that includes real-time account valuations and research from Desjardins Securities.

Bottom line: Nails this year's award for most improved broker.

Reasonable commissions

for stocks and fund: .25

Equity and mutual fund research: .75

On-line bond trading: --

Real-time account updates: 1

On-line transaction history: .5

On-line account maintenance: 1

Website navigation: .25

Account performance data: --

Equity order flexibility: .75

Value added: .5

TOTAL: 5

GRADE D

HSBC InvestDirect

http://www.investdirect.hsbc.ca

Owner: HSBC Holdings PLC

Lowdown: It's de rigueur for a bank to have an on-line brokerage service for its customers, which tells you why HSBC is going through the motions with InvestDirect. There's nothing especially odious about this brokerage, but it offers no compelling reason to sign up other than on-line access to the Hong Kong Stock market and access to the equity research of Merrill Lynch. On-line bond trading is coming, and that should help a bit.

Bottom line: For HSBC loyalists.

Reasonable commissions

for stocks and fund: .5

Equity and mutual fund research: .75

On-line bond trading: --

Real-time account updates: --

On-line transaction history: 1

On-line account maintenance: --

Website navigation: .5

Account performance data: --

Equity order flexibility: 1

Value added: .5

TOTAL: 4.25

GRADE F

eNorthern

http://www.enorthern.com

Owner: Northern Financial

Lowdown: There is just one reason to do business with this tiny firm and that's rock-bottom fees for trading stocks. You pay 2.5 cents a share with a minimum charge of $24, which can save you big bucks if you trade a lot. Then again, if you trade a lot you probably won't be satisfied with this broker.